While the IT industry may try and persuade us that technology has some inherent value of its own, the fact is that it is neutral until deployed. Since we use technology to facilitate cost savings and value creation it is obviously useful to have some notion how these benefits might be realised. What is not commonly appreciated is that all of these benefits relate to the way we handle data, information and knowledge. The cost savings we make are information related cost savings, and the value we might create is value derived from information.
Consider an organisation that is deploying a Customer Relationship Management system. The expected benefits are all information related – increased sales from better customer information, more timely promotions and the like. The most common use of IT is labour displacement – replacing people with automated processes. Here the cost savings relate directly to the cost of information processing.
A breakdown of the ways that IT can reduce costs and create value allows us to map the potential benefits of various technologies onto the costs and value associated with information.
Information costs are in the main labour costs. Sales orders, memos, contracts, emails and the myriad of information types an organisation produces are labour costs, with technology and systems costs that are typically an order of magnitude smaller. The average organisation spends thirty per cent of its revenues on information, and around three per cent on information technology. Reducing information costs is primarily a matter of reducing labour costs.
The following breakdown is a good starting point for an analysis of information costs:
- Acquisition costs – these represent the costs associated with entry of data into the systems an organisation uses. Data entry, email creation and the like are all acquisition costs and clearly represent a large slice of the information cost cake. It is worth pointing out that the systems that handle the acquired data might be manual.
- Storage costs – the data has to be stored somewhere. The volume of data organisations use continues to grow at a geometric rate, and as such storage costs continue to grow.
- Management costs – Information has to be managed, and governance requirements have given this additional importance in recent years.
- Integration costs – While information may come from diverse sources, most organisations require some level of integration. This makes the information available throughout the enterprise and facilitates business process management.
- Analysis costs – Deriving value from information requires analysis usually from Business Intelligence technologies. Analysis is a pre-requisite for value creation.
- Delivery costs – For information to be of use, people have to use it. Delivery of information has been given focus through the use of portals, the World Wide Web and mobile technologies.
- Usage costs – When people use information, labour costs are generated. The more efficiently people can gain access to the information they need the lower the associated labour costs.
Value Creation and Protection
While the dominant use of IT is cost reduction (90 per cent of organisations still think only in these terms) the fact remains that IT does and can help create value. This value falls into three categories:
- Transactional value – If sales and purchasing staff have timely, relevant information at their disposal we can expect that they will be able to create more value through transactional activities.
- Additional capability – IT can and is used to create new capability. Obvious examples include new channels to market through the Internet, or new levels of customer support by making information freely available.
- Knowledge capital – Intangible assets in the average organisation dominate tangible assets by a factor of two. Some commentators associate this with knowledge capital – the skills, collective knowledge and information resources owned by an organisation. It is after all these assets that determine the future prosperity of an organisation more than any others.
We should add here that security technologies and systems are mechanisms for protecting value and can be assessed in this light.
An analysis of technology should consider the various ways it can contribute to reduce costs and increased value within an organisation. There is however a set of technology related costs that, while small compared with those already mentioned, still need to be analysed. These are:
- Direct technology costs – the actual cost of the technology and supporting technologies that are required.
- Skills costs – the cost of associated skills including consultants, designers and so on.
- Training costs – all costs associated with training so that a technology can be used.
While these lists are not exhaustive they do represent the major cost and value components associated with IT. Analysing technologies in this way puts them in the context of the operation of the organisation itself, and not within the confines of an IT centric view. Business and technology management alike should be able to assess the potential a technology offer, and hopefully talk a common language.